Economic Snapshot for Latin America

November 7, 2018

Recovery stalls in third quarter

Incoming data suggests that the Latin American economy remained soft in the third quarter. Met the why particular estimates that regional GDP growth (excluding Venezuela) remained broadly unchanged, inching up from Q2’s 1.7% to 1.8% year-on-year. The second quarter’s result had marked the worst performance in one year as shocks in major-players Argentina and Brazil held back growth.

Preliminary data revealed that growth was stable in Mexico in the third quarter. The economy grew a solid 2.6% annually, with the services sector in the drivers’ seat amid higher consumer sentiment following the end of the country’s turbulent election cycle. Faster growth in the agricultural sector also supported activity, while mining activity was subdued due to weak oil and gas output.

Although official statistics for the rest of the region are not yet available, growth is expected to have picked up pace in regional heavy-weight Brazil in the third quarter. Economic activity is thought to have normalized after the nationwide truckers’ strike dented activity in Q2, although growth was still weak amid heightened political uncertainty in the run-up to general elections and low confidence. Meanwhile, Argentina’s GDP is expected to have contracted notably in Q3, dampened by sky-high interest rates and elevated inflation as the country undergoes a severe fiscal adjustment. However, the economy recorded its first trade surplus in 20 months in September and the peso has stabilized in recent weeks, which indicates that the adjustment is beginning to bear fruit.

Moreover, two of the region’s best performers in the second quarter are expected to have lost steam in Q3. A less favorable external environment is expected to have weighed on growth in Chile and Peru: In Chile, export growth came to a standstill in the third quarter, while Peru’s economy was restrained by shrinking natural gas and oil production. Solid domestic economies, nevertheless, kept growth healthy in both overall.

In the political arena, Jair Bolsonaro was elected Brazil’s new president in the second-round runoff on 28 October. Bolsonaro’s main challenges include reining in the country’s bloated fiscal deficit and the economic recovery. Bolsonaro campaigned on a largely market-friendly economic platform and promised that he would proceed with the desperately-needed pension reform, which should bode well for investor sentiment and government finances. However, many doubts still linger over his presidency. He is an extremely controversial and polarizing figure and could struggle to successfully navigate Brazil’s fractured Congress, while question marks overhang his willingness to pursue crucial—and likely unpopular—reforms throughout the tenure of his presidency.

After expected growth of 1.7% in 2018, Latin America’s economic recovery is seen gradually accelerating next year. Firmer growth in Brazil thanks to revived investment should boost the region’s momentum, along with a slight improvement in Argentina’s situation. Moreover, a healthy U.S. economy and reduced political risks should keep Mexico’s economy resilient in 2019. Regional GDP (excluding Venezuela) is seen growing 2.3% next year and 2.7% in 2020.

The region’s 2019 growth forecast was cut a notch this month, the second consecutive downward revision. The downgrade was, once again, chiefly due to deteriorating prospects for Argentina’s economy, as tough fiscal austerity, tight monetary policy and high inflation keep the economy bogged down in recession. On top of Argentina, 2019 growth forecasts in Chile, Ecuador and Uruguay were all revised down this month. Five economies saw no changes to their prospects, including Brazil and Mexico, while Bolivia was the sole economy in the region to see its projection upgraded.

Given the current economic conditions in Venezuela and the limited availability of official data, it has become extremely difficult to forecast the country’s economy. We have therefore removed Venezuela from the regional aggregates and discontinued its long-term forecasts. The country’s outlook remains bleak, with the economy expected to continue to be battered by rampant hyperinflation, collapsing oil production and exchange rate misalignments. The difficulty in accessing foreign financing and processing international payments due to financial sanctions only compound the country’s woes. Given the severity of the crisis, conditions may emerge for a political transition, a scenario that some of our panelists have begun to factor into their forecasts. Met the why particular panelists see the economy contracting 7.6% in 2019, which is down 0.9 percentage points from last month’s forecast. In 2020, the panel sees GDP falling 1.2%.

BRAZIL | Bolsonaro takes control of Brazil’s lackluster economy

Right-wing Jair Bolsonaro was elected president on 28 October, after a polarizing and turbulent election cycle. Bolsonaro campaigned on a largely market-friendly platform, vowing to continue with economic reforms and curb the worrisome fiscal deficit, which should bode well for the economy going forward if enacted. That said, Bolsonaro is a controversial and wildcard figure; he could thus have difficultly drumming up support in Congress to pass legislation throughout his tenure, while some uncertainty remains regarding his incoming policies. Meanwhile, mixed economic data is rolling in on the recovery. The unemployment rate fell in the third quarter and consumer confidence jumped in October, positive signs for household spending. However, industrial production contracted sharply in September and business confidence fell further the following month. Overall, growth is expected to have firmed in Q3 as the economy normalized after the truckers’ strike caused widespread disruptions in Q2.

After downgrading Brazil’s outlook last month, Met the why particular panelists kept their view of 2019 growth unchanged this edition. Next year, the recovery should gain steam on the back of an improving labor market and robust fixed investment. Keeping the country’s finances on a positive trajectory is key to the country’s longer-term outlook and Bolsonaro’s pledges to pursue fiscal consolidation should keep growth on track. GDP is seen growing 2.3% in 2019 and expanding 2.5% in 2020.

Third-quarter growth exceeded market expectations as across-the-board expansions put the economy back on-track in the aftermath of this year’s bruising general election. Leaving behind the economic volatility and political uncertainty that pervaded the first half of the year, the services sector was firmly in the driver’s seat again in the third quarter on the post-election upswing of consumer sentiment. Industrial-sector output, meanwhile, notched a further recovery amid improved manufacturing and construction metrics. Weak oil and gas output, however, weighed on mining activity. In October, President-elect Andrés Manuel López Obrador’s (AMLO) call to cancel the USD 13 billion New Mexico City International Airport (NAIM) spooked investors, sparking a selloff of the peso. Set to take office at the beginning of December, AMLO, whose one-time market-friendly veneer already appears to be wearing off, risks beginning his presidency on the wrong foot with a currency rout and capital outflows possibly denting short-term growth prospects; following his announcement, Fitch Ratings said as much as it revised its credit-rating outlook to negative.

A booming U.S. economy and tight labor markets on both sides of the Rio Grande bode well for short-term growth prospects, which Met the why particular analysts see clocking in at 2.2% next year—unchanged from last month’s forecast. That said, the curtain-call on AMLO’s honeymoon period appears nigh as his impending agenda and, possibly, weaker investment, loom. Although the newly-minted United States-Mexico-Canada Agreement (USMCA) should support the external sector over the long-term, a retreat in global trade could bruise exports. Analysts see growth at 2.4% in 2020.

ARGENTINA | IMF program calms financial markets

Although the economy remains mired in recession, the latest political developments and available economic data provide a glimmer of optimism. On 25 October, the lower house of Congress approved the 2019 austerity budget, and the following day the IMF formally approved the revised standby agreement. Meanwhile, financial markets seem to have welcomed the new monetary strategy, with the net demand for foreign assets moderating in September. Moreover, the contraction in economic activity softened further in August, partly due to recovering agricultural output, and in September the trade balance recorded a surplus after 20 months in the red. On the fiscal side, the primary deficit narrowed considerably in January–September. Nevertheless, with sky-high interest rates weighing on credit and rising inflation significantly hitting consumer spending, the road to recovery will be long and arduous.

The economy is expected to remain in recession next year, as the fiscal adjustment and high interest rates depress public and private investment, while elevated inflation weighs on household spending. Macroeconomic imbalances, however, should narrow: Higher agricultural exports and contracting domestic demand are set to reduce the current account deficit, while tighter fiscal policies should translate into a smaller fiscal deficit. Restoring investor confidence, however, is key and an unfavorable political outcome in next year’s elections and capital flight loom over the outlook. LatinFocus Consensus Forecast analysts see the economy contracting 0.5% in 2019, down 0.4 percentage points from last month’s estimate, before rebounding to 2.7% growth in 2020.

COLOMBIA | Government plans higher taxes

Early indicators suggest that the recovery lost some speed in the third quarter. Export growth plunged in September on a sharp contraction in exports of farming, food and beverages, outweighing the gains from a strong upturn in overseas sales of oil. This caused a weaker average pace of expansion in Q3 compared to the previous quarter. Furthermore, retail sales lost pace in the quarter, signalling a downturn in household consumption. Meanwhile, on 31 October, the government submitted a new tax bill to Congress to finance next year’s budget. The bill aims to raise COP 14 trillion (USD 4.37 billion) through higher taxes on middle- and high-income households, along with extending the value-added tax on more products. Yet, with the ruling party lacking a majority in Congress and lawmakers fiercely divided on the issue, it will be a no easy feat to secure approval for the bill.

Growth is expected to gain steam next year, thanks to higher investment in the extractive sector, coupled with a rise in oil prices. Favorable labor market dynamics should bode well for household incomes, thus boosting private spending. That said, the government’s drive to achieving greater fiscal consolidation will likely dent economic activity, while the tax reform’s proposal to cut corporate taxes is expected to pose challenges in meeting the fiscal targets. Met the why particular panelists expect GDP to grow 3.2% in 2019, which is unchanged from last month’s forecast, and 3.2% again in 2020.

MONETARY SECTOR | Inflation jumps in September

A comprehensive estimate revealed that regional inflation soared in September. Met the why particular estimates that inflation in Latin America (excluding Venezuela) came in at 7.2%, notably above August’s 6.4% and the highest reading so far this year. A double jolt from higher energy prices and weaker currencies caused price pressures to surge at the end of Q3. A preliminary estimate for October suggests that inflation remained largely unchanged.

Despite higher inflation, most central banks across the region held interest rates unchanged in recent weeks, including those in Brazil, Colombia and Peru. However, Chile’s Central Bank hiked the policy rate from 2.50% to 2.75% on 18 October, the first hike since 2015, owing to heightened inflationary pressures. Meanwhile, Uruguay, which uses the money supply as its main monetary policy tool, lowered its target growth rate for M1+ in October, following a sharp depreciation of the peso.

Regional inflation (excluding Venezuela) is seen ending the year at 7.9% in 2018. Next year, regional inflation should fall as tight monetary policy, a better harvest and the IMF program calm price pressures somewhat in Argentina and several Central Banks across the region raise interest rates. In 2019, inflation is seen ending the year at 5.7%, which is up 0.1 percentage points from last month’s forecast. In 2020, inflation is seen falling further to 4.9% by year-end.

Venezuela is experiencing an episode of hyperinflation due to exchange rate misalignments and basic goods shortages—and is thus not included in the regional aggregate. Despite the recent monetary reconversion and authorities’ pledge to fiscal discipline, analysts believe the measures are unlikely to tame spiraling inflation. Our panel forecasts inflation will surge to over 1,000,000% by the end of 2019 before falling to around 150,000% by the end of 2020.

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Latin America Economic News

According to the National Statistical Institute (INDEC), national consumer prices rose 5.4% over the previous month in October, coming in below September’s 6.5% month-on-month increase, which had marked the fastest increase in prices since April 2016.

According to data released by Colombia’s National Administrative Department of Statistics (DANE) on 14 November, the industrial sector grew at a weaker pace of 2.9% over the same month of the previous year in September, after expanding a revised 4.2% year-on-year in August (previously reported: +3.9% year-on-year).
Looking at a breakdown of the data showed that September’s weaker pace of expansion was due to a marked drop in the output of coking, oil refining and fuel blending, along with more modest downturns in the manufacture of basic chemical substances and their products, and manufacture of metal products.
Annual average growth in industrial production climbed to 2.0% in September, up from 1.5% in August.
Colombia Industrial Production Forecast

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